New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Property For Industry</h2>
Pulling Guidance but not Pulling the Dividend
OUTPERFORM
Property for Industry (PFI) has announced that it is pulling its FY20 dividend guidance of 7.65 to 7.7cps given the near-term operating uncertainties but still intends to pay quarterly dividends in FY20. We have not changed our recently revised FY20 dividend forecast of 5.8cps.&nbsp;PFI&nbsp;remains one of our preferred&nbsp;LPVs&nbsp;given its&nbsp;defensive&nbsp;attributes, internal management structure and the track record of the business through a number of cycles. OUTPERFORM.
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Withdrawing guidance
PFI has announced that it is pulling its FY20 dividend guidance of 7.65 to 7.7cps given the near-term operating uncertainties and also because it is only a quarter through FY20. PFI intends to update the market regarding 1Q20 on 8 May. It is important to note it is PFI's intention to still pay quarterly dividends. Our revised forecast in our recent Real Estate Reflections April 2020 Keeping it Real, dated 9 April, was 5.8cps for FY20 dividend, a 25% cut to our previous forecast. PFI has very few tenants that have a lock out or red zone type lease clause but this announcement is an acknowledgement that PFI will need to negotiate with some tenants with regard to near-term rent and to ensure its portfolio remains well positioned when this event passes. The vast bulk of its tenants are operational at level 3. A typical arrangement may be that PFI waives the rent or part of the rent for a short period and then claws all or some of this back at a later date. PFI noted that it is in a strong financial position with 28% gearing, a 3.7 year weighted average debt term and borrowings that are 65% bank debt/36% bonds.
Industrial attributes
Good, well located, industrial property has proven to be fairly resilient through the cycle, typically with a lower level of vacancy than office, but it has had a massive re-rating in terms of asset values over the last eight years. PFI is ~90% weighted to Auckland prime and secondary industrial property, and has 99% occupancy with a WALT of 5.4 years. Quality listed industrial occupancy only dropped to around the ~95% level last cycle. A deep occupier market and change of use optionality over the medium term provides defensive attributes for the industrial market, and vacancy was at record lows going into COVID-19 with modest new supply on the horizon.&nbsp;
We recently lowered near-term sector wide dividend pay-out ratios to capture uncertainties
There is considerable near-term revenue uncertainty given the unknowns around rent relief, government support and bankruptcy. We are yet to make material changes to forecast EPS or AFFO per share across the NZ LPV sector, however, we have adopted lower dividend pay-out ratios near-term to attempt to adjust for this uncertainty and present dividend yields that capture an element of near-term earnings downside and board conservatism around dividend payments. To date, only KPG has cancelled an upcoming dividend and is not paying its 2H20 dividend for the six months to 31 March. We remain with a defensive focus with preferred LPVs being IPL, PFI and VHP. See Figure 1 for a summary of our recent sector wide DPS changes.
 Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Property For Industry
Pulling Guidance but not Pulling the Dividend
OUTPERFORM
Property for Industry (PFI) has announced that it is pulling its FY20 dividend guidance of 7.65 to 7.7cps given the near-term operating uncertainties but still intends to pay quarterly dividends in FY20. We have not changed our recently revised FY20 dividend forecast of 5.8cps.&nbsp;PFI&nbsp;remains one of our preferred&nbsp;LPVs&nbsp;given its&nbsp;defensive&nbsp;attributes, internal management structure and the track record of the business through a number of cycles. OUTPERFORM.

Withdrawing guidance
PFI has announced that it is pulling its FY20 dividend guidance of 7.65 to 7.7cps given the near-term operating uncertainties and also because it is only a quarter through FY20. PFI intends to update the market regarding 1Q20 on 8 May. It is important to note it is PFI's intention to still pay quarterly dividends. Our revised forecast in our recent Real Estate Reflections April 2020 Keeping it Real, dated 9 April, was 5.8cps for FY20 dividend, a 25% cut to our previous forecast. PFI has very few tenants that have a lock out or red zone type lease clause but this announcement is an acknowledgement that PFI will need to negotiate with some tenants with regard to near-term rent and to ensure its portfolio remains well positioned when this event passes. The vast bulk of its tenants are operational at level 3. A typical arrangement may be that PFI waives the rent or part of the rent for a short period and then claws all or some of this back at a later date. PFI noted that it is in a strong financial position with 28% gearing, a 3.7 year weighted average debt term and borrowings that are 65% bank debt/36% bonds.
Industrial attributes
Good, well located, industrial property has proven to be fairly resilient through the cycle, typically with a lower level of vacancy than office, but it has had a massive re-rating in terms of asset values over the last eight years. PFI is ~90% weighted to Auckland prime and secondary industrial property, and has 99% occupancy with a WALT of 5.4 years. Quality listed industrial occupancy only dropped to around the ~95% level last cycle. A deep occupier market and change of use optionality over the medium term provides defensive attributes for the industrial market, and vacancy was at record lows going into COVID-19 with modest new supply on the horizon.&nbsp;
We recently lowered near-term sector wide dividend pay-out ratios to capture uncertainties
There is considerable near-term revenue uncertainty given the unknowns around rent relief, government support and bankruptcy. We are yet to make material changes to forecast EPS or AFFO per share across the NZ LPV sector, however, we have adopted lower dividend pay-out ratios near-term to attempt to adjust for this uncertainty and present dividend yields that capture an element of near-term earnings downside and board conservatism around dividend payments. To date, only KPG has cancelled an upcoming dividend and is not paying its 2H20 dividend for the six months to 31 March. We remain with a defensive focus with preferred LPVs being IPL, PFI and VHP. See Figure 1 for a summary of our recent sector wide DPS changes.
 Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022


Property For Industry: Pulling Guidance but Not Pulling the Dividend